I'm the Founder and Managing Partner of Ironfire Capital LLC, which runs a tech-focused hedge fund and angel fund. I did a Ph.D. in Management at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management. You can follow me on Twitter @ericjackson, subscribe to me on Facebook, follow me on Sina Weibo, or Circle me on Google+. My email is: dr.eric.jackson@me.com

Why Drastic Change is Needed On June 23rd For Yahoo!'s Board

Carol Bartz Must Accept Responsibility for the Current Mess with Alibaba Group

It’s time for a change at the top of Yahoo!

On June 23rd, Yahoo!’s (YHOO) owners – its investors – will vote on whether each member of the board of directors should serve for another year. I will be voting against the re-election of 6 out of 10 of them. I hope others will join me, after thinking about their fitness to serve one more year.

Yesterday’s Investor Day did offer some clarity around ongoing negotiations between Yahoo! and Alibaba Group. It also gave some hope and optimism around their “core” business as led by Ross Levinsohn and Blake Irving. However, there was no basic explanation or defense for how poorly the Alibaba relationship has been handled since Carol Bartz took over as CEO and even prior to that under Jerry Yang’s watch.

Carol’s, Jerry’s and CFO Tim Morse’s basic response to angry investors yesterday who wanted to know how the Alipay affair could have happened in the first place was: “We have agreed with our partners not to talk about the past here today and only focus on the future.” How convenient for them to not have to hold themselves accountable to shareholders’ legitimate questions.

There were other answers and explanations which annoyed me yesterday such as the explanation that Jerry and Tim were the ones who went to Asia last week to meet with Alibaba Group without Carol. The Alibaba relationship and investment is the most important asset which Yahoo! possesses. This terrible chain of events over the past two weeks was entirely preventable. And – even now – Carol doesn’t get on a plane to go and make it right? Obviously, either Jack Ma and Joe Tsai of Alibaba want nothing to do with her or Carol doesn’t think this crisis is important enough for her to go. As a shareholder, either way, it’s damning and suggests she should leave now.

There was another off-the-cuff comment Carol gave in the Alibaba Q&A at the start of the session where she started answering a question she admitted she didn’t really know the answer to by saying, “Well, my husband says I will answer anything so I will take a shot at answering that question….” It was unprofessional and again belied the gravity of the current state of affairs.

My other favorite Carol comment from yesterday was, before a break, “We are going to be maniacal about getting you out of here on time today at 2pm.” If only she had been maniacal about handling the Alibaba relationship properly from the start.

I would have liked the Q&A session on Alipay to go on much longer. Let’s face it, it should have been 90% of the time spent on the agenda – at least from an investor’s perspective – yet it was only 10%. But, frankly, Jerry, Carol, and Tim wouldn’t have had anything else to say beyond their talking points.

Carol, Jerry, Tim, and the entire Yahoo! board – who has been a hands-off board forever, even going back to the Tim Koogle early days – need to be held accountable for their mistakes with regards to Alibaba. Yahoo! shareholders have given this board a pass for too long – and they can change that on June 23rd when they vote on which directors should get re-elected for the coming year.

If other Yahoo! owners decide to join me in voting against them, the company will be forced into making sweeping changes to its corporate governance. The last vestiges of a corporate board who over-paid Terry Semel, thumbed its nose at Microsoft’s (MSFT) $31 buyout offer in February 2008, backed management in pouring millions into reviving its own search engine before reversing course, and tacitly approved a policy of non-communication with Alibaba Group for the last year.

It is time for shareholders to say no more.

I will be voting against the re-election of each and every one of the following directors:

- Carol Bartz: She is the CEO who has failed to turn around the part of the company that she does control and to communicate effectively with the more important part of the company (Alibaba Group) that she doesn’t control. She is not involved in the current Alibaba discussions it would appear and has poorly communicated her plans for the company for the last year. It’s time for her to leave.

- Jerry Yang: The co-founder who has been Yahoo!’s sole representative on the Alibaba Group board since 2005. I thought Jerry did a better job than Carol yesterday explaining where the Alibaba relationship was but he clearly is also responsible for dropping the Alibaba ball in the past 2 years. I don’t expect a “no” vote to lead to Jerry leaving the company or board. However, I’ll be voting against his re-election because I want his knuckles rapped severely for this breakdown.

- Roy Bostock: Yahoo!’s Chairman who is ultimately responsible for hiring and firing Carol and for the Alibaba relationship. For Yahoo! shareholders, Bostock – who was appointed by Terry Semel in 2003, and still defends his decision to fumble the Microsoft offer – is their primary representative. He deserves to go just for that. Other than Carol, there is no single individual who is more responsible for Yahoo!’s failed corporate governance recently than Bostock.

- Art Kern: He is the longest serving member of the Yahoo! board with the exception of Yang, joining the board in 1996. That is simply too long to be a member of such a bad board. Why should Kern stay? He has supported every decision made by the board since then. At some point in corporate America, performance needs to have consequences.

- Gary Wilson: A buddy of Roy Bostock’s from their Northwest Airlines days and of Terry Semel’s. Wilson joined Yahoo!’s board in 2001. Like Kern and Bostock, he’s been there too long for too many bad decisions.

- VJ Joshi: When Joshi joined Yahoo!’s board in 2005, his division was one of the most successful within HP (HPQ) and he was considered a possible CEO one day. Today, his division is struggling with profitability and HP itself is trying desperately to right its ship. He has also been on Yahoo!’s board too long and he really should be spending 100% of his time running his challenged division. He’s not doing Yahoo!’s or HP’s shareholders any favors by continuing to serve on this board and rubber-stamping its decisions.

There are problems with the other 4 members of Yahoo!’s board as 3 out of 4 of them are active CEOs themselves. However, for continuity’s sake, I believe they should be allowed to continue on the board. They also have the advantage of being spread across the different existing board committees (such as Audit, Compensation and “Transactions & Strategic Planning”). Therefore, none of these board duties would be harmed from continuing through a transitionary period to a new board to fill the vacant spots.

And, as I said above, I believe Jerry would remain on the board, even if he got more than 50% of the vote cast against him.

What would be gained for Yahoo!’s shareholders from such a drastic voting result?

Imagine if we woke up on June 24th and found that Bartz, Bostock, Kern, Wilson, and Joshi had not received 50% of shareholders’ votes in support of them staying on Yahoo!’s board for the coming year.

I believe we would see:

- A final sweeping out of the old members from the board responsible for lax oversight of this company in the last 5 years.

- A fresh start with the Alibaba Group relationship. Fresh start doesn’t mean Yahoo! will roll over and do whatever Alibaba demands. It means that the new leadership will treat the relationship with the care and respect it deserves. Yahoo! will aim to work more constructively for the long-term benefit of its shareholders.

Of course, there are active discussions going on between Yang and Morse on Yahoo!’s side with Alibaba Group. Those are going to continue before June 23rd and afterwards.

How would Yahoo! shareholders be penalized from such a drastic voting result?

- If a deal is being discussed and contemplated at the moment behind closed doors between Yahoo!, Softbank, and Alibaba Group, I believe Yahoo!’s shareholders will get a better (not worse) deal if Yahoo! shareholders vote in this manner to clean house. It will send a message to Alibaba Group that Yahoo! shareholders want to sincerely start the relationship fresh but want value from their existing stake.

- Continuity at Yahoo! would not be compromised. Yahoo! would not have to accept Bartz’ or Yang’s resignation if they thought management continuity would be put in question. If David Kenney or some other internal or external candidate is ready and willing to step into the role of CEO for Yahoo!, great. If not, and there is no ready candidate to step in, Carol is still under contract until such a person can be found. Additionally, Levinsohn and Irving clearly showed they have firm hands on the wheel of the core Yahoo! business with their performance yesterday.

- Board continuity would not be affected in any way and half the board would remain and all key committees would retain existing board members with institutional knowledge.

- Yahoo!’s negotiating leverage vis-à-vis Yahoo! Japan or Alibaba Group would be heightened, not lessened.

- The turnaround in the “core” business would not be affected. Levinsohn and Irving are still in place, executing their plan. It would be business as usual for Yahoo! employees.

Back at the 2008 shareholders’ meeting, after Yahoo!’s board fumbled the Microsoft buyout offer, Yahoo! investors could only choose between the status quo board and a Carl Ichan-led board which seemed to have no real grasp of an Internet business. They were forced to stick with the bad existing board. There is a choice for change today by saying no to the worst and longest-serving existing board members.

What has to happen for Yahoo!’s board to understand how upset its shareholders are? Will it require more problems to convince Yahoo!’s shareholders enough is enough?

If you’re a shareholder, you need to vote your shares in the manner you believe will be most helpful for increasing the value of Yahoo!’s stock price.

For me, the choice is clear. It’s time to vote “no” to Bartz, Yang, Bostock, Kern, Wilson, and Joshi.

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As a long-term shareholder of Yahoo, I think Carol has performed well. What were you expecting Eric? Full front attacks in search, mobile and other hotly-contested areas when Yahoo was crumbling? The strategy to retreat and regroup, and erect fortifications around its well-performing core was the wisest thing she could have done given Yahoo’s vulnerable position back then. Carol has done just that and the initial results can already be seen/felt by any common Yahoo user.

Now that it seems the core has been enhanced and protected, we should allow Carol a bit more time to launch her attacks.

Don’t forget, it took Steve Jobs several years to come up with the first iPod and to engineer the greatest turnaround in corporate history.

I started investing in Yahoo not so long ago, so perhaps there’s still more patience within me. I know you’ve been with Yahoo for a few good years and you may be running out of patience. However, this is probably the best time in a long time to remain positive and keep faith in Yahoo and its management.

As for the Alipay drama, why should Carol fly to HK to apologize? Apologize to who? for what? I will post or email you my personal view/insights on this burning matter.